The sun is shining in Misrata on Friday morning, and in Tripoli Street they're selling souvenirs. On a trestle table, little flags, buttons and hats emblazoned in the Libyan tricolour – red, black and green – provide an island of brightness in the blasted grey landscape of pulverised buildings and wrecked tanks that is now downtown Misrata. "We're a business-minded city," says Ali, a slim young trader in a long brown robe.

Indeed they are. With the enemy now pushed back beyond artillery range, this battered city is shaking itself back to life. Squads of boys too young to fight are out tidying the streets, painting white lines along the highways and manufacturing souvenirs.

Ali's stand, a trestle table, is crowded with key fobs, T-shirts and hats, all in the official colours – the ancient Libyan tricolour which had replaced the despised plain green flag of the Gaddafi regime.

Shops are open and sell a bizarre array of goods: fresh fruit is rare, but there is HP sauce, After Eights and Cornettos. With 11,000 tonnes of grain in the elevator nobody goes hungry and there are no humanitarian aid workers here because, fighting apart, there is no humanitarian crisis.

There is also a bit of the "What did the Romans do for us?" in the ritual hatred people have for Muammar Gaddafi. "He gave us nothing," says an engineer, who formed a little gang which goes to hospitals and schools fixing the shelling damage, as we pass smart cars and prosperous houses. "The roads he made are a mess," he adds, as we cruise along an elegant cloverleaf intersection over a wide immaculate freeway. In fact, the city did very well under Gaddafi.

The bigger truth may be that people in this city managed to work around the repression, and prospered. The hatred is more for what Gaddafi has inflicted on them since they dared to protest against his rule.

Along with the business acumen of a city that has a centuries-old tradition as a trading centre go pride and machismo. The rebel fighters who call themselves shebab – youth – insist that they will be proud to die.

Mohamed Salum, a bearded 50-year-old oil engineer wandering around Liberation Square, says it would be the greatest honour for his 20-year-old son to fall in the struggle, which will make him shaheed – roughly translated as martyr. "We have jihad. If you die in jihad, you go the heaven, it is the highest thing we have. It is an honour."

"Oh really?"

Well, more or less. A longer conversation reveals his acute anxiety about his son going to the battlefield. Parental consent was finally given when his son delivered an unquashable argument. "He said, 'If we win this war [and] I am not involved, I am going to have to wear a skirt and live with my sister'."

The conversation takes place to the familiar thump of Grad rockets landing in the outskirts, but nobody bothers too much. An army press conference the night before spoke of confidence in coming victories, with Gaddafi's forces beaten and demoralised.

Back at the media centre, a cramped room in a guarded compound, comes news that Apache helicopter gunships have struck targets overnight near Misrata. The Ministry of Defence website features tweets from a British colonel about how the Gaddafi forces are being taught a sharp lesson. The war seems almost won.

Then a Reuters TV correspondent comes in, slumping into a chair, face masked in sweat. He has been at the front and says that this is no ordinary shelling. "A disaster," he says. "The dead are everywhere. Bodies. I saw a pick-up with six bodies."

I hitch a ride to Misrata's Hikma hospital to find bedlam; so many people have arrived, either to give blood or to search for relatives, that the road has been cleared to make way for the ambulances. They arrive, brakes screeching, at regular intervals, doctors rushing to unload the fragile smashed human cargoes.

The hospital is working at full stretch, operating theatres set up in tents in the courtyard full, the staff so overworked that female nurses, in headscarves and mascara, are treating the men, a rare exception to the rule.

Bodies with terrible wounds are brought in. A teenage boy sits crying in the corner, having seen his cousin carried in with shrapnel wounds to the head, body and legs. "I told him to be quiet," says a hospital volunteer. "Your cousin is not yet shaheed."

Inside the tents, doctors work frantically. A female nurse holds the forearm of a young fighter who stares into the middle distance. The arm is almost severed and she must hold his forearm to stop it flopping to his side while a splint is arranged. The boy soon drifts into sedation and the doctors say that the arm will have to come off. I follow a gurney being wheeled into the car park to be washed, sunlight glinting on blood sloshing around on the fabric.

At the media centre, the bad news keeps coming. Patrick Wells, a British cameraman, arrives from the frontline field hospital in shock, reporting that mangled bodies came in so fast they were using brooms to clear the blood from the floor. "A young guy, maybe 18 years old, had had his leg blown apart. Doctors were sticking their hands into the open muscles, trying to clamp the femoral artery," he says.

Finally, noticing the less badly wounded left on stretchers untended, he stopped filming and went over to hold their hands: "It's funny how taking a guy's hand makes him calmer."

Video arrives from the frontline showing the shebab standing around in groups as Grads and mortars crash around them. And a terrible truth dawns: the rebels, however brave they are, have no idea what they are doing. Professional armies dig in, but not the shebab; the result is a human abattoir.

By the day's end the toll is 31 dead with 120 wounded. The city is in shock; this after a week of constant attacks with a combined toll in excess of 300 casualties.

The sun goes down to the thud of Grads mixed with the beautiful, sad wailing from the minarets – the city imams singing Allah's name to bring comfort to the inhabitants. A driver taking me from the hotel tells me that two of his cousins have died, then asks in polite tones: "Where is Nato?"

Where indeed? For weeks the alliance ramped up its promise of Apaches. Finally they struck, and Friday's bombardment was Gaddafi's response — one which saw no countermove from Nato, apparently because the Apache is too vulnerable to ground fire to be risked in daylight operations,

In other words, Nato bit Gaddafi and the dictator bit back twice as hard, leaving the alliance to make a choice. Either it stops fighting a war with one arm behind its back or it gets out and lifts the arms embargo to allow the shebab to buy the weapons they need. But something has to give. The shebab of Misrata cannot take many more days like Friday.